1. Fin 4201/8001 Topic 4: Valuing Companies The early years….Ratios

2. Ratios Measure the strength of various firm aspects Measure the strength of various firm aspects Informational needs of creditors and investors Informational needs of creditors and investors Facilitate time-series or cross-sectional analysis Facilitate time-series or cross-sectional analysis Five types Five types Activity Activity Liquidity Liquidity Debt and solvency Debt and solvency Profitability Profitability Valuation Valuation

3. Activity Ratios 1) Inventory turnover – COGS/Avg. inventory 2) Receivables turn – Sales/Avg. Receivables 3) Working Capital turn – Sales/Avg. Working Capital 4) Fixed Assets turn – Sales / Avg.Fixed Assets 5) Total Assets turn – Sales / Avg. Total Assets

4. Activity Ratios 1 Inventory Turnover 4.55 Cost of goods sold 2142 Average Inventory 471 Avg. no. of days inventory in stock 80 2 Receivables turnover 10.76Sales4063 Average Receivables 378 Avg. no. of days receivables are outstanding 34

5. Activity Ratios 4 Fixed assets turnover 2.60 Sales4063 Average fixed assets 1563 3 Working capital turnover 18.26Sales4063 Average working capital 223

6. Activity Ratios 5 Total assets turnover 1.21 Sales4063 Avg. total assets 3348

7. Liquidity Ratios 1) Current – Current Asset / Current Liability 2) Quick – $+securities+AR / Current Liability 3) Cash – $+securities / Current Liability– COGS/Avg. inventory

8. Liquidity Ratios 1 Current ratio 1.25 Current Assets 1020 Current Liabilities 815 2 Quick ratio 0.72 Cash + Mkt. sec + Accounts Receivable 584 Current Liabilities 815

9. Liquidity Ratios 3 Cash Ratio 0.23 Cash + Mkt. sec 190 Current Liabilities 815

10. Debt and Solvency Ratios 1) Long-term Debt to Capital – Long-term debt + other long-term liab. / Total capital (debt + equity) 2) Long-term Debt to Equity – Long-term debt + other long-term liab. / Total capital (debt + equity) 3) Times Interest Earned – EBIT / Interest Expense

11. Debt and Solvency Ratios 1 Long-term Debt to total capital (no deferred tax or CL) 0.54 Long-term debt 1226 Total capital (Long-term debt plus SH's eqty) 2268 Long-term Debt to total capital (no CL) 0.60 Long-term debt plus deferred tax 1547 Total capital 2589

12. Debt and Solvency Ratios 2 Long-term Debt to equity 1.18 Long-term debt 1226 Total equity 1042 Long-term Debt to equity 1.48 Long-term debt plus deferred tax 1547 Total equity 1042

13. Debt and Solvency Ratios 3 Times Interest earned 6.92 EBIT595 Interest expenses 86

14. Profitability Ratios 1) Gross Margin – Gross Profit / Sales 2) Operating Margin – Operating Income / Sales 3) Margin before Interest and Tax – EBIT / Sales 4) Pre-tax Margin – EBT / Sales 5) Profit Margin – Net Income / Sales

15. Profitability Ratios 1 Gross margin 0.47 Gross profit 1921 Sales4063 2 Operating margin 0.19 Operating income 753 Sales4063

16. Profitability Ratios 3 Margin before interest and tax 0.15 EBIT595 Sales4063 4 Pre-tax margin 0.14EBT557 Sales4063

17. Profitability Ratios 5 Profit margin 0.08 Net Income 341 Sales4063

18. Valuation Ratios 1) Price to Earnings (P/E) – Price / EPS 2) Price to Book (P/B) – Price / Book value per share 3) Price to Tangible Book – Price / Tangible Assets per share

19. Valuation Ratios 1 P/E Ratio 32.73 Price per share 62 Earnings per share 1.89 2 Price to book value 10.71 Price per share 62 Book Value per share 5.79 Book Value = Sh's equity / no. of shares

20. Valuation Ratios 3 Price to Tangible Assets 3.88 Price per share 62 Tangible assets per share 16

21. Other stuff not covered here, but may want to address in your analysis Return on Invested Capital (ROIC) – NOPLAT/ Invested Capital covered with spreadsheet later Return on Invested Capital (ROIC) – NOPLAT/ Invested Capital covered with spreadsheet later Return on Assets (ROA) – Net income + After-tax interest / Avg. Total Assets Return on Assets (ROA) – Net income + After-tax interest / Avg. Total Assets Return on Equity (ROE) – Net Income / Avg. Total equity Return on Equity (ROE) – Net Income / Avg. Total equity

22. Other stuff not covered here, but may want to address in your analysis DuPont system DuPont system 2 is greatest when no leverage 2 is greatest when no leverage 1*2*3 = profit margin 1*2*3 = profit margin 4 = asset turnover 4 = asset turnover 3 * 4 = ROA (does not depend on leverage) 3 * 4 = ROA (does not depend on leverage) 5 = leverage ratio – boosts ROE only if ROA>cost capital 5 = leverage ratio – boosts ROE only if ROA>cost capital

23. Dupont should get you to the same place Return on equity (ROE) 0.36 Net Income 341 Average total equity 948 OR Profit margin 0.08 Total asset turnover 1.21 Financial leverage 3.53 Note some rounding error 0.35

24. Still more ratios PEG – PE ratio / Earnings growth evaluates if price of growth is being realized PEG – PE ratio / Earnings growth evaluates if price of growth is being realized Enterprise value / EBITDA (market cap + total debt – Total cash) / EBITDA good for comparisons if high level of debt or high level of cash Enterprise value / EBITDA (market cap + total debt – Total cash) / EBITDA good for comparisons if high level of debt or high level of cash Fixed asset spending / Depreciation higher may reveal long term planning, but needs to cover at least 3 years Fixed asset spending / Depreciation higher may reveal long term planning, but needs to cover at least 3 years